Along with the surging popularity of the Internet, there has been a corresponding surge in the usage of the Internet by individuals for online investment education, research and transactions. As noted in the popular media, millions of individuals, via the Internet, conduct online investment transactions, most of which involve buying and selling of stocks. According to the Wall Street Journal, for example, 3.7 million U.S. households conducted at least one online investment transaction for the six months ended February, 2001, which was actually an 18% decrease from the 4.5 million U.S. households which conducted at least one online investment transaction for the six months ended August, 2000. “Online Traders Disappear, But Perhaps Not For Good”, The Wall Street Journal, Mar. 28, 2001.
While online stock trading has proliferated, online options transactions have only increased incrementally. The primary reason for this appears to be a lack of understanding among investors about what options are and how they can become a meaningful part of one's investment strategy.
In broad terms, options allow an investor with a hunch about the direction of a security's price to try to profit from that hunch without having to lay out the full amount it would cost to purchase the security. For example, a call option gives its holder the right but not the obligation to purchase a security (e.g., stock) at a preselected price (i.e., the “strike price”) by a preselected date. An investor typically buys a call option if he believes that the value of the security will increase by the preselected date. By contrast, a put option gives its holder the right but not the obligation to sell a security at a preselected price by a preselected date. An investor typically buys a put option if he believes that the value of the security will decrease by the preselected date.
A call option is “in the money” when the strike price is below the price of the security. For example, a call option with a strike price of $50 per share for XYZ Company's stock is in the money when XYZ Company's stock price is trading at $58 per share. A put option is “in the money” when the strike price is above the price of the security. For example, a put option with a strike price of $56 per share for XYZ Company's stock is in the money when XYZ Company's stock price is trading at $49 per share.
Generally, a binary option, also known as all-or-nothing option, bet option, digital option or lottery option, is a European option with a fixed, predetermined payoff if the underlying instrument or index is at or beyond the strike price at expiration. The value of the payoff is not affected by the magnitude of the difference between the underlying instrument or index and the strike price. The strike price is the price at which the options contract stipulates the underlying instrument or index will be bought or sold. A European style option is one which can only be exercised on its expiration date. By contrast, an American style option is an option which the holder may exercise any time up to and including the option's expiration date.
There are two types of binary options, a cash-or-nothing and asset-or-nothing options. A holder of a cash-or-nothing binary option receives a fixed payoff if the option expires in the money or nothing if the option expires out of the money. A holder of an asset-or-nothing binary option receives the underlying asset if the option expires in the money or nothing if the option expires out of the money.
A range accumulation option or warrant is a series of binary options with each option covering a short period. The payoff of the range accumulation option is the sum of the payoffs of the component binary options. The component options, in turn, payoff when the underlying price or rate falls within a designated range. Range accumulation options may be stand-alone instruments, but they are frequently embedded in notes to create Index Range Notes or LIBOR Range Notes.
An Index Range Note is a note with a coupon determined largely or entirely by an embedded range accumulation option. Equity indexes, currency exchange rates and interest rates are among the underlying indexes, prices or rates that can determine the payoff. LIBOR (i.e., London Inter-Bank Offered Rate) Range Notes are the most common variety of Index Range Notes.
As the above descriptions relating to options demonstrates, especially the descriptions relating to binary options and range accumulation options, educating an investor about options is no easy task. This difficulty is also faced by financial institutions, such as the assignee of the present patent application, as they try to educate their employees concerning options and to determine who, among their employees, may have the skills necessary to make good options transactions.
What is desired, therefore, is an interactive technological system and method that facilitates learning about and trading options by allowing a user to predict performance of a financial vehicle and that also helps a financial institution to objectively determine which employees may have the skills necessary to make good options transactions.